Everything you need to know about Mortgages

3 Easy Steps to do Before House Hunting

1. Determine your Buying Power - Speak to a mortgage lender to determine a loan that fits your needs. Knowing a little about your loan options before you do this can make the process much less stressful. Think about the loan term you would like, 30 yr or 15 yr? A 30 year loan is easier to pay off financially because your loan payments are less, but remember a 15 year loan, which will cost more monthly now, can actually mean you pay half of what it would cost with a 30 yr.  Further, think about how much of a down payment you would like and how long you will be planning on living in the home. Most importantly, make sure when calculating your costs to include insurance, taxes, maintenance costs, and association fees. Doing so will give you a realistic price of the home you can afford.
2. Go Shopping....for a loan - It is extremely important to take care of all financial data before even looking at a home. Do this by speaking with your Bank, a mortgage broker, or an online broker. Banks can be great to use, especially if you have credit history with them. The process can be simple, but banks tend to have more "rules" when lending out their money. Mortgage brokers shop around for the best loan according to your needs and can save you money. Online lenders can qualify you quickly, but tend to not be the best option for a new home loan. The process might be cheap, but it can cause many headaches on the way to closing. Most importantly, don't let interests rates be the driving force to your final decision. Consider closing costs, APR, possible penalties, additional lender fees, and Points. A great interest rate doesn't mean much when you have to pay thousands up front to obtain the loan.
3. Get Pre-Approved - In today's real estate world, just being Pre-Qualified is not enough. Home owners are demanding buyers take the loan process further by getting pre-approved. Lenders actually look at proof of employment, assets, liabilities, loans, tax returns etc, and determine the available loan amount from the information. This valuable process can be the difference between your offer getting accepted over another. 

Types of Mortgages

• Conventional - available to borrowers who have a work history with the same employer for at least two years. Good credit history and the income necessary to support payments are a must.
• Stated Income - available to borrowers who are retired or self-employeed. Anyone commission based falls into this category also. Instead of the normal process of documentation, you simply state your income, show you have good credit, and that you have prior timely payment history. The interest rate is almost always higher then industry standard to protect the lender.
• Adjustable Rate (ARM) - for those who need a low monthly payment in the beginning and plan on either refinancing within a few years or selling. Beware though, this type of loan has interests rates that adjust with the market. If interests rates climb, so does your mortgage and you could be stuck with a loan payment you can no longer afford.
• Fixed Rate - a conventional loan with a fixed interest rate over the life of the loan. Monthly payments are always the same and if interest rates rise, yours doesn't.
• Balloon - loans with a short term, usually three to ten years. At the end of the term, the loan must be paid in full, no matter what the sum. Some borrowers use a 80/20 or 80/10/10 loan. The balloon amount is 10-20% of the loan, with the main 80% being a standard conventional mortgage. Good for those who will sell quickly or refinance the loan.
• FHA - the Federal Housing Administration offers assistance to those who qualify under their income guidelines. Borrowers can buy with as little as 3% down and have sellers pay higher than normal closing costs on their behalf.

• VA - the Veterans Administration Mortgage is available to qualified individuals and their dependents who have served in the armed forces. Many first time military home buyers use this loan because 100% financing is available and the loan is guaranteed by the federal agency.

More Mortgage Terms

Escrow - when an offer is placed on a home, the buyer must put down a"good faith" deposit to show his or her commitment to completing the sale. These funds are held in escrow by a neutral third party and released at closing to the buyer. Please be aware that if you default on the contract, you could lose this deposit.

Points - finance charges paid to the lender either to adjust for poor credit, or pay down the interest at the start of the loan. One point is equal to 1% of the mortgage amount. Points must be paid at closing by the borrower.

Contract for Deed - very popular in Minnesota's past! The owner/seller holds title and receives monthly payments from the buyer, according to the contract. Buyers do not go through a lender and have little to no closing costs. When the terms are completed the seller then transfers title to the borrower.

Private Mortgage Insurance (PMI) - insurance a borrower must carry if their down payment is less than 20% of the purchase price. It protects the lender against default and enables the lender to loan for the higher risk.

Credit Scores - the most important thing to know and the first thing lenders look at. Lenders love a score above 680...they'll loan you almost anything. Between 620-680, you are a moderate risk, but will most likely have no trouble obtaining financing.  Anything between 580-620 means high risk and you might have to pay a higher interest rate. Below 580 and chances are you will not qualify for a conventional loan and might have to seek help from FHA.